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A manufacturer's main objective is to achieve production efficiency. This is the point at which its total cost (TC) equals its marginal cost (MC). In the short run, the quantity of at least one input in the manufacturing process remains fixed while the other inputs vary. Figuring out the short run cost allows the company to identify its diminishing returns or the point at which its marginal cost begins to rise. In other words, the company can no longer spread its total cost over its output without incurring an increase in its marginal costs.
Total up all of your fixed costs. These are the costs that do not vary with the level of output (at least in the short run). Examples of fixed costs are certain utility bills, indirect labor and rental expense.
Calculate average fixed costs (AFC) by dividing total fixed by output (Q). For example, AFC is $2.78 if your total fixed cost is $1,250 and output (Q) is 450 ($1,250/ 450).
Total up all variable costs. These are the costs that vary with the level of input. Examples of variable costs include raw materials, hourly wages, utilities such as electric and gas. As an example, use a total variable cost (TVC) that equals $750.
Calculate average variable cost (AVC) by dividing TVC by output (Q) of units produced. For example, if during the short run you produced 450 widgets, the AVC is $1.67 if Q is 450 (750/ 450).
Add your AFC and AVC to obtain short run total costs (TC). From the previous example, total average costs equal $4.45. Total average costs will decline as you spread the cost over more units of production. This represents your economies of scale.